Spain moves nearer to full-scale rescue

Towers of one Euro coins Is Spain heading towards a full-scale rescue?

Once again Spain, and to a lesser extent Italy, is being forced towards a full-scale eurozone/IMF rescue programme, because of the inter-connectedness of public-sector and banking liabilities.

As the price of Spanish government debt plummets, that generates losses for Spain's banks, which hold around 250bn euros of the country's government bonds, equivalent to a third of central government debt.

That then increases the size of the hole in their balance sheets, and therefore the scale of the official rescue from taxpayers they will eventually require.

But, as importantly, the more that investors and savers doubt Spain's creditworthiness, the more they doubt its ability to stand behind its banks.

This may not be wholly rational, given that the eurozone has promised 100bn euros of rescue funds earmarked specifically for rescuing Spain's banks. But it is also not wholly irrational, since it is by no means clear yet how, when and even whether the eurozone will succeed in turning that 100bn euros into a liability of the banks alone, without adding to the burden on the financially stretched Spanish state.

One consequence is that Spanish banks are becoming more and more dependent, for their very survival, on exceptional funding from the European Central Bank.

"The chilling statistics"

Here are the chilling statistics. In the first five months of the year, Spain's banks lost 3% of their deposits as savers moved their cash to perceived safe havens, such as Germany, or spent their accumulated savings to make up for the collapse in their incomes.

Meanwhile, in not much more than six months, Spanish banks' borrowing from the European Central Bank has risen from 106bn euros (in November 2011) to 365bn euros - or 9.5% of all their borrowing needs.

The relevant comparators are not encouraging. The banks of Ireland and Portugal, two countries already in formal rescue programmes provided by the Eurozone and IMF, are dependent on funding from the ECB to the tune of 13.5% and 10% of their respective liabilities.

Or to put it another way, the ECB's support for Spain's banks is already around the levels in Ireland and Portugal at which the ECB felt that enough was enough, and put pressure on eurozone governments to provide a full-blown rescue programme for those countries.

Which is partly why investors tell me they no longer believe that Spain can muddle through just with a rescue provided by the eurozone's bailout funds, the EFSF and ESM, of its banks.

What may have tipped it over the edge is the disclosure last week that Spanish regions, led by Valencia, will need loans from central governments so that they can repay their debts (some 15bn euros of Spanish regional government debt comes up for repayment in the second half of this year).

Spain's fragility is one you know well: the leg bone of an economy in a recession estimated to last two years is connected to the knee bone of undercapitalised banks is connected to the thigh bone of regions with debts they can't repay is connected to the hip bone of a government which cannot borrow at affordable rates.

Them financial bones stand or fall together, and right now they look set to fall.

Running out of time?

How much time does the Spanish government have to ward off disaster?

Well in part that is down to the patience of the European Central Bank - or rather its appetite to increase its exposure to Spain's banks.

It is also down to Spain's appetite for paying penal borrowing costs for a period.

What is particularly frightening about what has happened to Spanish debt prices today is not just that they imply Spain would have to pay an unaffordable 7.5% to borrow for ten years - which is the normal litmus of the difficulty being faced by a government when borrowing.

Perhaps more serious is that it would have to pay interest of 7.4% to borrow for five years and more than 6.5% when borrowing for as little as two years.

You, dear reader, would probably pay less than 6.5% when borrowing for two years. And you are not a sovereign government (I presume).

In other words, there is no temporary refuge for Spain in borrowing for shorter periods. Its day of reckoning, in the sense of a decision on whether to become the first really big eurozone economy to subject itself to the humiliation of being run from Brussels and Washington, by the European Commission and IMF, looms.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 277.


    "discussions tend to branch away from set topics & all the better for this."

    For all the nonsense you post, I couldn't agree more with that! (Took a while...)

    Vive la difference!

  • Comment number 276.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 275.

    268. Not sure if I should take this as a compliment or not. However, discussions tend to branch away from set topics & all the better for this. At least it's a step up from the trite banker bashing & the attendent deregulation myth which is repeated infinitum on this site

  • rate this

    Comment number 274.

    269. You clearly don't get down to Africa that often. For starters natural resources do not make you rich. Much growth in Africa is coming from internal forces: stability, better structures & most imptly grt certainty under law. Kenya is a prime eg. But then you will of course cont to pump out the colonial line; Africa can't solve its own probs; it needs enlightened indivs such as yourself.

  • rate this

    Comment number 273.

    #267 Powermeerkat - Apartheid is white oppression of Africans. Don't reinvent it for your own palatability. And whites continue to be far richer than their black counterparts.

    If they are running it is because the results of their mismanagement are starting to make themselves felt with them.

  • Comment number 272.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 271.

    Wonder how many more years we will be reading about the problems facing Euro Zone Members?
    Will all be well in 2013....2014....2015.? Or any of the years after that?
    Or will Economic Experts and all Polticians just admit.....they know as much as any other European Citizen?
    Will they keep on pretending that they do?

  • rate this

    Comment number 270.

    "The money was spent on defeating Soviet Union"

    If only life really were as simple as your sanitised, blue-eyed, crass All-American version. It's not (thank God!).

    Reagan did not defeat the Soviet Union. The Soviet Union did. Like a fish, it rotted from the head downwards.

    Like the US is doing now...?

  • rate this

    Comment number 269.

    #263 Yep. There is money flooding in to get hold of scarce resources if that's what you mean. And contractors don't like working in war zones.

    Although there is still war in Eastern Congo that has claimed several hundred thousand lives and we have just emerged from Sudanese civil war and we are in the midst of a war in Somalia.

    Sometimes consumer market visibility yields results though;-)

  • rate this

    Comment number 268.


    Yes, I thought you were a troll. Now I know you are.

  • rate this

    Comment number 267.

    United Dreamer: Aided and abetted by Apartheid South Africa."

    I'm glad you agree there's still apartheid in S. Africa.

    [That's why so many well educated opressed whites are leaving]

    Now, about your IP...

  • rate this

    Comment number 266.

    Re #264 ComradeOgilvy

    It doesn't look like China is in good enough shape to help progress ANYWHERE. Including African countries it ruthlessly exploits.

    And least of all PRC itself:

  • rate this

    Comment number 265.

    United Dreamer :

    "The Angolans and Mozambicans are very happy for Cuban "

    Portugal (an EZ country) happy that Angola and Mozambique are giving jobs to unemployed Portuguese in those hard times in EZ.

    Dream on for EZ unity, dream on!

    ["Men cannot live without dreams". (Vladimir I. LENIN)]

  • rate this

    Comment number 264.

    Angola is not a great example of progress in Africa.

    The major economic force in Africa these days is China, usurping the traditionally European role of exploiters. New masters, no difference to the poor.

  • rate this

    Comment number 263.

    As it may but the point remains that there is more peace in Africa now than there has been for at least the last 30 years and with this (or my be the driver) has been emerging economic forces that are lifting many out of poverty

  • rate this

    Comment number 262.

    #261 fTP Angola did not emerge from the Communist yoke.

    They emerged from the yoke of a civil war between the government and the UNITA war lord, Savimba. Supported directly both by the CIA and apartheid South Africa.

    Direct Cuban support was required to stop a South African invasion force in its tracks in 88.

    Only with peace and the restoration of government could they start prospering.

  • rate this

    Comment number 261.

    258. At least Angola has emerged from the communist yoke and is now one of Africa's success stories with good economic growth and a more stable inclusive political system.

  • rate this

    Comment number 260.

    #172 CL.
    "The one question I have is who controls it?"

    It controls itself. All that's needed is agreement for the time being on the composition of the basket.

    "A free standing currency nice in theory but not practical".

    It worked very well when the currency was gold!

    Gold wouldn't work now, and anyway a basket (including energy, already traded) would, because it's insulated against volatility

  • rate this

    Comment number 259.

    "Why must we have one ring to rule them all?"

    International trade requires an international medium of exchange.

    I think you're seriously misguided. A significant proportion of deals are barter already: the proposal just goes one logical step further, because barter is inefficient. Also because the $ benefits only the US plutocracy's interests.

  • rate this

    Comment number 258.

    "246. powermeerkat

    The Peanut Farmer who did nothing when Soviets invaded Angola and Mozambique through their Cuban proxies and thus encouraged them to invade AFGHANISTAN?"

    The Angolans and Mozambicans are very happy for Cuban help in keeping at bay the murderous UNITA supported by the CIA and Renamo whose mines have claimed thousands of limbs.

    Aided and abetted by Apartheid South Africa.


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